Sharp pullback for Nasdaq

JulieRannazzisi

NEW YORK (CBS.MW) -- The Nasdaq succumbed to a bout of profit-taking Tuesday, with the greatest weakness detected in the software and Internet sectors. And a tumble in shares of AT&T kept the Dow Industrials in negative territory throughout most of the session.

Weakness in Microsoft shares kept shares deep in the red and put a damper on the entire tech sector. Also lower were and chip stocks. The latter came under pressure late in the day, with the off 4.8 percent.

In the broader market, , paper and bank issues rose while biotech, and transportation stocks lost ground. Safe-haven gold stocks surged, with the up a heady 10.5 percent.

"The market reminds me of a hamster wheel -- it's just running in place with participants spinning from sector to sector," remarked Richard Babson, chairman and president of Babson-United. "Short-term players are looking for momentum and finding that there's very little cover."

"This market is looking for direction, which explains the continued volatility. Unfortunately the catalyst [for Tuesday's move] was AT&T," said Peter Coolidge, senior equity trader at Brean Murray & Co.

Coolidge believes it will be difficult to build on the market's recent gains with the possibility of a 50 basis point rate hike in a couple of weeks.

The Dow Industrials
DJIA, +0.17%
lost 80.66 points, or 0.7 percent, to 10,731.12, led lower by shares of AT&T, Microsoft, Intel and SBC Communications.

Upside leaders included DuPont, Philip Morris, International Paper and Merck.

Shares of AT&T
T, -0.28%
dropped 7 1/16, or 14.4 percent, to 41 15/16 after the company guided analysts to lower their earnings estimates for the year during a conference call following the company's earnings release.

Ma Bell said it downwardly revised 2000 operating earnings to $1.80 to $1.85 a share from the previous $1.89 to $1.94. First Call had expected earnings per share of $2.08 in 2000. Further, AT&T said its pro forma revenue for 2000 would increase approximately 7 to 8 percent rather than the previously estimated 8 to 9 percent.

The Nasdaq Composite
$compq
tumbled 172.63 points, or 4.4 percent, to 3,785.45 -- its tenth largest point decrease in history.

Tuesday's tech sell-off hobbled small and large- cap stocks alike. The Nasdaq 100 index
$ndx
, which brings together the largest Nasdaq stocks by market capitalization, lost 202.53 points, or 5.3 percent, to 3,627.31.

Volume checked in at 1.01 billion on the Big Board and at a light 1.43 billion on the Nasdaq Stock Market. Losers outpaced losers by 17 to 13 on the NYSE and by 26 to 15 on the Nasdaq.

Waiting for the Fed

With investors waiting for more information on the state of the labor market on Friday and productivity figures due out on Thursday, market watchers believe that equity trading will remain cautious.

"We're likely to remain rangebound until the Fed meets," said Bill Schneider, head of block trading at Warburg Dillon Read. "Earnings have supported this market. [And] prices have been able to cling on to piece of good news. But it's difficult to be overly bullish in this kind of environment -- though it's easier to be constructive compared to two weeks ago."

Babson believes the market hasn't fully priced in the possibility of a rate hike of 50 basis points and hasn't taken into account the fact that more increases in short-term rates will be necessary to cool off the hot U.S. economy.

Coolidge believes the market has factored in a 1/2 percent rate increase at the next FOMC meeting but agrees that market participants may perceive a more aggressive move at the May Fed meeting as the Fed's last one. That, he added, would be a mistake.

Brian Slater, portfolio manager at Condor Capital Management, believes the market is already bracing for a strong jobs report given the strength in last week's employment cost index.

Even a larger-than-expected drop in the unemployment rate, Slater said, isn't likely to catch the market off guard. The stock market, he added, is already pricing in the possibility of a 50 basis point move by the Fed on May 16.

Fed funds futures, which gauge tightening expectations, are fully pricing in a 50 basis point move by the end of June and a roughly 50 percent probability of another 25 basis point rate hike.

Tuesday's economic data reinforced the perception that the Fed still has lots of work to do on the tightening front in order to soften the U.S. economy.

March new homes sales, in fact, rose 4.5 percent to 966,000 compared to the expected 902,000 -- its highest level since Nov. 1998. .

"Once again, the housing market is approaching record sales and that makes it clear that higher interest rates are doing nothing to slow consumer spending," said Joel Naroff, chief U.S. economist at Naroff Economic Advisors.

"The members of the FOMC are probably shell-shocked by the continued strength in the so-called interest sensitive sectors such as housing. The appearance of pricing power is not something that the Fed wants to see and now that it is here, the [Fed] will have to do something about it," Naroff continued.

Sector watch

The online brokerage sector came under some pressure following a downgrade of Ameritrade [a: amtd] to a "neutral" from "outperform" by Lehman Brothers. Ameritrade lost 1 5/16 to 15, E-Trade shed 1 3/16 to 19 5/8 and DLJ Direct inched down 9/16 to 10 1/2.

Moreover, Lehman Brothers initiated coverage on Charles Schwab, Goldman Sachs and Morgan Stanley Dean Witter with only a "neutral" rating. And Lehman began coverage on Merrill Lynch with an "outperform" rating.

Merrill Lynch's Internet Infrastructure Index
iih
fell 5.4 percent, losing ground in afternoon trading following a 3.3 percent increase earlier in the session. A climb in BroadVision
BVSN, +0.98%
-- which ended up 3 7/8, or 9 percent, to 46 15/16 -- was behind the upward move in the Holdrs. BroadVision benefited from an upgrade to Goldman Sachs' recommended list from a "market outperform" and from an upgrade by CS First Boston to a "strong buy" from a "buy."

Expedia
EXPE, +1.21%
checked in with a third-quarter loss of 40 cents per share late Monday. That was well ahead of the First Call projection of a loss of 57 cents a share. The stock rose 1 5/16 to 20 13/16.

Shares of Starbucks added 1 to 31 15/16. The company
SBUX, -0.14%
was upgraded by Morgan Stanley Dean Witter to a "strong buy" from an "outperform."

After the close Tuesday, Novell
novl
warned of significant revenue and earnings shortfalls for its second quarter. The company expects second-quarter earnings of 8 cents per share, short of the First Call estimate of 16 cents a share. Shares closed down 1 3/8 to 17 9/16 and traded down 4 5/8 to 12 15/16 on Island.

See for post-market trading activity.

Late Tuesday, Perot Systems
PER, +0.17%
registered first-quarter earnings of 17 cents a share, a penny ahead of the First Call estimate. The stock ended up 7/8 to 19 1/8 ahead of the news.

In the bond market, prices lost ground, with losses concentrated in the long end of the yield curve. The 10-year Treasury note lost 5/32 to yield
TNX, +1.17%
6.30 percent and the 30-year bond fell 11/32 to yield
TYX, +1.00%
6.01 percent.

In other economic news, March leading economic indicators inched up 0.1 percent compared to an expected flat reading.

Wednesday will see the release of March factory orders, expected to rise by 1.3 percent, the April NAPM non-manufacturing index, and the Fed's Beige Book report on economic conditions. View and .

In currency markets, dollar/yen inched down 0.3 percent to 108.41 but remained at levels not seen in about two months. Euro/dollar was off 0.6 percent to 0.9097.

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